Bankruptcy fees

Boom, bust, bonanza

Court-awarded fees disadvantage creditors

EVEN the darkest cloud has a silver lining. Just ask the insolvency lawyers and other professionals who are raking in fees from the fast-growing number of large financial and corporate bankruptcies. None is doing better than Weil, Gotshal & Manges, the lead law firm in the clean-up at Lehman Brothers. It has requested more than $100m of fees in the case so far. Over half of that has already been approved by the presiding judge. In the four months to May, the most recent period billed for, Weil's lawyers worked 86,000 hours on Lehman, with the most senior partners getting around $1,000 per hour. They spent an estimated $692,000 on computer research and $224,000 on photocopies.

When all is done, lawyers, financial advisers, restructuring experts and others could bag close to $1 billion in court-awarded fees from Lehman, well above the $757m they received after Enron's demise, the record for a bankruptcy case. Their work is far from over. In August a British judge rejected a scheme that would have accelerated the winding-up of the failed investment bank's operations by dividing its creditors into three classes. Administrators of Lehman's London arm are considering litigation against its erstwhile parent.

It is frustratingly hard to say how much value for money these professionals provide. The judges who must approve their fees lack the time and expertise needed to review them properly. Just as importantly, judges in America have an incentive to go easy on fee requests. With bust companies allowed to choose which state they file in, forum-shopping is rampant. “Courts are well aware that one way to compete is by not messing with fees,” says Lynn LoPucki, a professor at UCLA Law School.

So aggressive has this battle become that courts themselves appear prepared to bend or break the rules to win cases. A new study of 102 large-company bankruptcies between 1998 and 2007, by Mr LoPucki and Joseph Doherty, also of UCLA, finds that bankruptcy judges routinely authorise fee practices that violate America's bankruptcy code. These allow some fees to be paid before the court has even seen the request, for instance, and exempt some professionals from statutory disclosures.

The way to bring discipline to fees is to curb forum-shopping by insisting that firms only file in places where they have their headquarters or principal assets, argues Mr LoPucki. An alternative approach would be to force courts to make more use of services that audit lawyers' bills, such as Legal Cost Control and Legalbill. Their experts are trained to weed out excesses, such as billing for paralegal staff rather than cheaper clerks for menial tasks.

There are signs of pushback. In August, for instance, creditors of LandAmerica, a bust insurer, filed more than two dozen objections to the fee requests of the four law firms working on the case. The Obama administration is talking to fee-auditing firms about vetting bills incurred by its rescue programmes. Until courts tighten their scrutiny of fees, creditors have good reason to stay vigilant themselves.